Student loans: pay them off or save for retirement?

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries.
1. How much for college?
2. Information security
3. Repay loans? Save for retirement?
4. Investigating a mutual fund
5. New central air while retired
6. Vision coverage
7. Trading by mail
8. Helping Mom
9. Credit type question
10. Habitual borrowing

Our two oldest children have recently discovered a treasure trove of the childhood toys of their parents. Watching our children play with the things we played with during our childhood has been quite fun for Sarah and myself, particularly when they mix them in with their own toys and create all kinds of crazy new adventures.

Q1: How much for college?
How much do you expect to contribute to your children’s college experience? I’m not a big fan of the idea of paying the whole bill b/c I think they need to take some ownership and I’m also not planning on pushing them to college right away if they don’t show that they have a really concrete idea of what they want to study etc. But I also adored my college experience so I want it to be available to them.
- Andy

Like you, I don’t intend to pay for all of the college education of my children, for several reasons.

For one, I don’t think it’s financially good for myself or my children for me to sacrifice retirement savings for their college education. This causes me to have to work for longer and have a higher likelihood of being a burden on those children when I’m old.

For another, I think there are valuable lessons learned when you’re facing the real cost of a college education instead of just believing someone else is paying for it. Either you have to pay for it yourself or you have to earn it from somewhere.

I do intend to help them significantly with their costs. I’m not going to just write a check, however.

Andy had another question of interest, too.

Q2: Information security
Do you feel like all your online financial interactions (bank accounts, transactions, investments) are secure? I think the movie The Net (with Sandra Bullock)from my college days has had a lasting impact on my confidence with all my information being ‘out there’.
- Andy

There’s virtually no way you can live today without some amount of your information online. Yes, that does mean we all have some small risk of identity theft.

I personally try to minimize that risk whenever I can. I avoid signing up for services that require me to share personal data without providing some enormous benefit in return. Mint is a good example of this, where you’re sharing personal data with a middle man for what I consider to be a very small benefit.

All you can do is be vigilant. Look at your credit report regularly. Watch your credit card bills for strange payments. Don’t slack off with this, either.

Q3: Repay loans? Save for retirement?
I just graduated with my masters, have not found a full time job yet, and am debating what to do with my student loans. I have $67k worth of loans that I start paying in November (given that I find a job). I am going to be a teacher and worried that my salary won’t be enough to cover the monthly loan payment unless I consolidate or do the income based payment plan. I also obviously want to start saving for retirement as soon as possible. However, I also realize that extending the life of the loan will mean owing a lot more in the long run. Should I try to make the regular payments and pay them off in ten years? Or is that too unrealistic?
- Ellen

Your first priority is to find a job. Don’t worry about choosing between retirement and student loan repayment yet. A bird in the hand is always worth two in the bush.

Once you have that job, I would make sure that I was picking up all of the matching funds from my employer. For example, if your employer offers a match on the first 4% of your salary, contribute 4% so you can get that match. After that, I would contribute enough so that your total contribution including matches is 10%. Beyond that, I’d hammer on the student loans.

If you don’t find a job, keep those student loans in forbearance. While this won’t help with the overall cost of the loan, it will help you from getting behind on your debts.

Q4: Investigating a mutual fund
What procedure do you use to investigate a mutual fund?
- Sharon

Most of the information I look for is in the prospectus for that fund, which you can often find online or, in a few cases, request from the investing house that’s running the fund.

Key things I look for are the investment philosophy behind the fund, the fees they charge, and the types of investments the fund contains. I tend to stick to index funds, which typically have a very straightforward philosophy, low fees, and clear delineations on what’s invested.

I don’t put much value into “superstar” fund managers or the things that are said in the financial press about the funds. Those are usually just the result of PR.

Q5: New central air while retired
I need to get a new furnace and while I’m at it, central air. I just retired April 1st. I do have enough money in my retirement fund to pay for this. But i wonder if I should get a home improvement loan at 8% interest from my states housing development office instead. I’m 64, will be 65 in a few months, and I’m afraid to start chipping away at the retirement fund. What do you think?
- Kathy

It’s really hard to give an accurate answer here without a full picture of your retirement situation. Is your retirement just Social Security plus the money you have in a 401(k)? Do you have a pension, too? Does your monthly income in retirement greatly exceed your monthly expenses, or are you cutting it close? All of these factors would change which decision you should make.

My conclusion would generally be that the less dependent you are on the regular income from your retirement savings, the more I would lean toward using it instead of taking out an 8% loan. The interest on an 8% loan is almost always going to be higher than what you’ll earn in your retirement account.

If you’re really tight, a loan might be unavoidable as long as it’s coupled with cutting back on expenses. You may find, though, that you have to get some additional income to make ends meet.

Q6: Vision coverage
We had our yearly benefits meeting at work this week, which has caused me to take a look at my various insurance coverages. Here is some background: I am a divorced mother of 3 (1 in college no longer living at home, 1 in middle school, 1 elementary). My ex-husband passed away three years ago. I live together with my fiance; we own a home. He recently lost his job and is in the process of applying for disability due to a chronic illness from which he suffers.

Through work, I purchase medical insurance (with includes a vision benefit), dental insurance, and I also pay for additional life insurance (very cheap – $6/pck?) on top of the small amount that is provided to me free by my company. (It has no cash value but if I die, it will pay 3 x my salary.) I also (through my employer) pay for additional AFLAC policies – cancer, accident, and hospitalization.

I have the opportunity to buy additional vision coverage for about $7.00/month (note that only one of us wears glasses and even those are just for reading) and also short-term disability (which I had when I was still child bearing, but stopped purchasing after I had my last child). We are changing companies so I could reenroll in short term disability now during the “open enrollment”.

My questions are: should I buy the additional vision coverage? (I think I just answered that question for myself…) Should I buy the short-term disability? And what are your thoughts on the AFLAC coverages? Being a “single parent”, I am really trying to make sure we would be covered in all possible scenarios. But money is also tight, I do have some debts I am paying down, and I don’t want to pay for something I really don’t need.

All of these things would run me a little over $200/pck. Thoughts?
- Shanda

I don’t think the vision insurance is worthwhile at this point.

The question of further insurance is a tricky one that has more to do with your own comfort level than anything. You can never insure against everything. The best you can do is cover yourself against the most common calamities and assume the risk of some of the less likely ones.

Where’s that cutoff line? It’s different for each person and it has more to do with your ability to sleep at night than anything else. The more you insure, the more “what-ifs” you’re preotected against, but the less money you have for your everyday life. That’s a balancing act, and everyone has a different balance that’s right for them.

I can’t tell you what’s right. All I can say is that you are insuring against a lot of risks that others aren’t insured against. You have to decide for yourself where the line is.

Q7: Trading by mail
You’ve mentioned that you do a lot of book and video game and DVD and board game trading through the mail. How do you do this?
- Robert

I do my book and DVD trading through PaperBackSwap and SwapADVD. I just mail out ones I don’t want to watch or read any more and get new ones in the mail in exchange.

I usually trade video games at a local used video game store. I found that, if I traded by mail, I often got very scratched disks.

As for board games, I usually participate in online “math trades” organized by BGG. In these trades, you just list some games you have that you’re willing to trade, look at the list of games that everyone has posted, and then mark down which of your games you’d be willing to trade for some of the games listed. After that, a computer program makes the longest list of trades possible (many of them involve person A sending a game to person B, B sending to C, C sending to D, and then D sending a game to A, for example).

Q8: Helping Mom
I am 26 years old and work in the insurance industry. I have been reading your posts religously now for about a year now. Thank you for your wonderful posts. I currently make 46,000 with great benefits like a paid company car and 6% 401k match. Since reading your post, I have started contributing 6% to my 401k and 5% to a Roth IRA thorough employer w/ Vanguard. Currently I have just over $7000 in retirement savings, $8500 in savings (of which I will be using 5k for furniture and move to East Coast w/ my boyfriend). I also have $2500 in an HSA accout as I carry a high deductible health plan. My credit score is currently 641. I wish it was a lot higher, but I’m working to repay some old debts that my ex-boyfriend and I took out. Totally dumb, but that’s the topic of another conversation. In debt, I have $15,000 in student loans that I pay $125/month at 5.8%. $3,500 in a credit card (the debt w/ ex-boyfriend). I also have an auto loan on an 07 vehicle my mother currently pays $305 w/ $10,000 left in loan. I transfered the car to her as my new company gave me a company car, and selling it made no sense since I was upside down on loan. All I pay on company car is $67 every two weeks for taxes and insurance.

I feel as though I am on the right track financially. Sadly, I cannot say the same for my family. My family all lives above their means. My mother recently came to me with the request for me get a loan approved for “her home” in Las Vegas, NV. The home would be in my name and my mother would pay all costs. My mother has a bad credit score after a lenghty divorce and poor decisions. We currenly live in San Francisco, but she would like to move to LV to be closer to family. I have a married older sister, uncle, and dad that live there. As you know, with the housing crash, there are a lot of empty homes in LV. My mother has her heart set on moving into a home valued at $40-50k. She could provide 8K down. She feels this would be a comfortable payment for her. In fact, much less than she’s currently paying to rent. With my move to east coast, and no other family around, I am starting to feel guilty. While I would like to help her, I feel as though this is LARGE responsibility. I can only think of cons to this arrangement. Is there any way we can arrange this so that there is a benefit for her and I? Is it even a good idea?
- Kelly

Most of the discomfort you’re feeling likely comes from a sense that your mother isn’t financially reliable, and you seem to have good reasons for feeling that way. If her credit is in poor enough shape that she can’t get a $32,000 mortgage loan, then I’d be worried about lending to her, too.

I think it’s reasonable to assume that there’s a good chance your mother might not make the payments she’s promising. Can you financially handle the situation in which your mother doesn’t pay? If you can’t, then you shouldn’t go forward with this. You have to simply tell your mother that you don’t have the means to make it work.

You can discuss a contract, but in the end, you’re still going to be on the hook for the house unless you pursue legal action against your mother. Are you really going to do that?

Q9: Credit type question
My husband and I have just paid off our car note. We have 2 credit cards which we use sparingly and pay in full each month. We also have 3 mortgages. One is for our primary residence. We also did an 80/20 on our retirement home, which we also use as a vacation home/weekend retreat. In hindsight, I know we should have waited to buy the retirement home, but we can’t change that now.

In about a year, we will need to refinance the 20% note for our retirement home. It’s a 5 year with a balloon payment (another mistake). Although we have been trying to pay it down, a laid-off has hindered that and refinancing is necessary. Currently, our credit scores are 798/800, something we have strived to achieve and want to maintain. How is the lack of different types of current credit accounts going to hurt our credit score? We don’t want to borrow money just to keep our credit scores up, but we don’t want them to go down because we have so few types of credit.

I know that the types of credit only account for about 10% of the credit score, but that would knock our scores down to the low 700′s, which I have a hard time accepting. Is there anything we can do about this?
- Lilith

If you have multiple mortgages and multiple credit cards, you won’t lose too much due to lack of diversity in your credit score. I’ve had only a mortgage and some zero-balance credit cards for quite a while now and my credit score is quite high.

Generally, this portion of your credit score only suffers if you have a ton of debt and it’s only one type of debt. Even in that case, it does not have a significant negative effect – 10 or 20 points, perhaps.

Remember, this is all anecdotal. Credit agencies do not release the exact methods for how credit scores are calculated.

Q10: Habitual borrowing
I have a friend that often asks to borrow $5 or $10 at lunch or when we’re out for drinks. At first, I did this without asking, but I’ve come to see he never pays anyone back. How should I handle this?
- Lenny

For starters, don’t loan him money. This is a black hole for you and it’s not worth continually dumping in cash.

If you want to recoup some of the money, go out to lunch and ask to borrow money from him. Recoup the money as best you can through borrowing. Make it clear that he can knock it off the tab of what he owes you.

If that feels uncomfortable, just stop going out to lunch or out for drinks with this person, or else just say you don’t have the cash to spare. He’ll move onto someone else pretty quickly.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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